Corporate taxation in China: A 25% unified rate

TM

Corporate taxation in China
Prepare for opportunity
A practical guide from the Economist Intelligence Unit

www.eiu.com


Market outlook
2010 2011 2012 2013 2014 2015
Population (m) 1,312 1,320 1,328 1,335 1,342 1,349
GDP (US$ bn at market exchange rates) 5,878 6,821 8,090 9,569 11,196 12,973
GDP per head (US$ at market exchange rates) 4,479 5,166 6,092 7,166 8,341 9,618
GDP (US$ bn at PPP) 10,241 11,388 12,724 14,162 15,756 17,533
GDP per head (US$ at PPP) 7,803 8,625 9,582 10,606 11,738 12,999
Household consumption (US$ bn) 2,050.4 2,498.8 2,995.9 3,614.8 4,314.6 5,075.1
Household consumption per head (US$) 1,560 1,890 2,260 2,710 3,210 3,760
Exports of goods & services (% change) 15.8 8.6 9.6 9.0 8.9 9.1
Imports of goods & services (% change) 14.0 10.0 10.5 12.3 12.0 11.1

Foreign companies continue to be attracted by the opportunities offered by China’s large and rapidly
growing economy. China has a population of over 1.3bn, and the size of the economy is likely to grow
to just under US$13trn a year at market exchange rates by 2015. Although GDP per head will still be
relatively low by the end of the forecast period, at just under US$10,000 a year, this will represent a
substantial improvement from just under US$4,500 in 2010. Significant regional disparities within
China will persist. The provinces of the eastern seaboard enjoy standards of living well above the
national average. However, there are also markets to be found in inland China, where many large cities
are located. To some extent, the size of the population and the pace of economic growth belie the
challenges of operating in China. Nationwide distribution networks will increasingly be put in place,
but the Chinese market is likely still to be a fragmented one by 2015.
Market opportunities for foreign companies in China are greatest in those sectors where domestic
enterprises are weak, markets are underdeveloped and market opening is proceeding fastest. Although
the government continues to ban foreign firms from a number of industries—such as broadcasting and
armaments—or to restrict their involvement, overseas companies continue to find numerous business
opportunities in a wide range of sectors across the economy. Market opportunities are opening up
for companies that can advance the government’s strategic objectives either within or outside the
country. Chinese enterprises are also looking for joint-venture partners in resource exploitation and
infrastructure.
The Chinese government encourages both labour-intensive industries, to soak up surplus labour,
and capital-intensive enterprises, which can raise the quality of the national industrial base.
Foreign companies are also welcome in infrastructure. The government may shy away from imported
technology where there is deemed to be a local substitute. Consumer-goods markets are more open
and competitive and do not rely on government procurement.

1 © The Economist Intelligence Unit Limited 2011


Overview of taxation
The long-awaited Corporate Income Tax Law took effect on January 1st 2008; it introduced universal
income tax rates for both foreign and local enterprises. The law, passed at the annual full gathering of
the National People’s Congress (the national legislature) in March 2007, replaced the Unified Tax Law
of 1991, which had provided the legal basis for preferential tax rates for foreign-invested enterprises
(FIEs).
The momentum towards a unified rate was accelerated after China’s entry into the World Trade
Organisation in December 2001, since Chinese officials argued that WTO rules prohibit unequal tax
treatment of foreign and domestic companies. And since China has emerged as a coveted investment
destination, it no longer needs such incentives to attract foreign funding.
Generally speaking, the new Corporate Income Tax Law has made operating in China more
expensive for FIEs. It introduced a new, uniform 25% taxation rate; prior to the law, many FIEs enjoyed
preferential treatment, paying rates as low as 15%. In contrast, domestic Chinese companies had faced
a 33% tax rate under the old system—though far from all actually paid this high rate. Lowering that
rate to the new unified 25% makes the domestic companies more competitive.
The State Council, or Cabinet, in December 2007 passed the Detailed Implementation Regulations
for the Corporate Income Tax Law, which the State Administration of Taxation (SAT) and the Ministry of
Finance prepared. On December 26th 2007 the State Council issued a special tax circular specifying the
grandfathering regulations for companies previously paying tax at 15%; accordingly, these companies
paid 18% in 2008, 20% in 2009 and 22% in 2010; they will pay 24% in 2011 and 25% in 2012.
Even after the release of the Detailed Implementation Regulations, FIEs complained that there was
still less than full clarity about the ramifications of the new tax regime. It is likely that the holes will
gradually be filled in as new rules are announced. However, the laws would seek to simplify existing,
often extremely complex rules that gave preferential treatment to foreigners.
The Corporate Income Tax Law provides that a preferential 15% tax rate will apply to high- and
new-technology enterprises, regardless of whether they are foreign or domestic. The Detailed
Implementation Regulations issued in December 2007 stipulate that ownership of “core proprietary
intellectual-property rights” is crucial for qualifying for the preferential rate. This could be a
potential problem since, according to PricewaterhouseCoopers, a consultancy, “it is not common
for multinational companies to transfer ownership of their core intellectual-property rights to their
Chinese subsidiaries due to various reasons including intellectual-property protections concerns.”
In a related measure, the Detailed Implementation Regulations specify special income tax
incentives for venture-capital firms that invest in unlisted high- and new-technology enterprises.
Following two years of investment, the venture-capital firm can offset 70% of the invested amount
against its taxable income.
A preferential 20% tax rate applies for small enterprises with modest profits, as long as they do
not engage in economic activity prohibited or restricted by the authorities, according to the Detailed
Implementation Regulations. Industrial enterprises qualify for this category if they have annual



income of less than Rmb300,000, total assets of no more than Rmb30m and fewer than 100 employees.
For non-industrial enterprises, the criteria are annual income of less than Rmb300,000, total assets of
no more than Rmb10m and fewer than 80 employees.
The Detailed Implementation Regulations permit companies to deduct against taxable income
150% of research-and-development expenditures. Similarly, they may deduct 100% of salaries to
handicapped staff. For income earned from the transfer of technology, the first Rmb5m is tax exempt,
whereas a 12.5% tax applies on the remainder.
Certain tax holidays remain in place even under the new laws and are open to both foreign
and domestic enterprises. For example, the State Council, the Ministry of Finance and the State
Administration of Taxation issued Circular 1 in February 2008, providing incentives that include the
following:
l Newly established software companies enjoy a two-year tax holiday and a 50% reduction of tax
payment of three years, which begins from the first year of profitability.
l Integrated-circuit makers with investment of more than Rmb8bn and an operation period of at least
15 years can enjoy a five-year tax holiday followed by a 50% reduction in tax payments for five years.
Apart from the Corporate Income Tax Law, enterprises in China continue to operate under a system
introduced in January 1994. The system includes indirect taxes that apply to both local enterprises and
FIEs, and also value-added, business and consumption taxes.
The State Administration of Taxation (SAT) and its provincial and municipal offices administer
China’s tax policies. The SAT and the Ministry of Finance together develop tax legislation and policy.
Each locality in China boasts a state tax bureau under the SAT and a local tax bureau under the local
government. This arrangement seeks to improve control over tax administration, and it represents a
compromise between the central and local governments on the issue of sharing tax revenue.
The SAT and other government agencies have long tried to strengthen regulations and combat tax
evasion. For example, the SAT issued rules, implemented on March 1st 2003, to reduce tax evasion
by companies going through debt restructuring. If an indebted company, as part of a restructuring
agreement with the creditor, pays back less than the full taxable value of the debt, the difference
must be treated as taxable income. FIEs face suspicions that they engage in widespread tax fraud by
transferring their profits overseas or by over-reporting their losses.



Tax regime
(score; 10=good)
Asia and Australasia (av) China
10 10

9 9

8 8

7 7

6 6

5 5

4 4

3 3

2 2

1 1

0 0
2006 2007 2008 2009 2010 2011 2012
Source: Economist Intelligence Unit.

Corporate tax rates
Under the Corporate Income Tax Law implemented on January 1st 2008, the basic income tax rate that
applies to foreign and domestic enterprises is 25%, with some enterprises eligible for preferential
rates in certain circumstances. The new law will gradually phase out the preferential tax rates that
foreign enterprises have enjoyed, mainly by virtue of having foreign ownership.
High- and new-technology enterprises, regardless of whether they are foreign or domestic,
face a preferential 15% tax rate. In a related measure, the Detailed Implementation Regulations
specify special income tax incentives for venture-capital firms that invest in unlisted high- and new-
technology enterprises. Following two years of investment, the venture-capital firm can offset 70% of
the invested amount against its taxable income.
A preferential 20% tax rate applies for small enterprises with modest profits, as long as they do not
engage in economic activity prohibited or restricted by the authorities. Industrial enterprises qualify
for this category if they have annual income of less than Rmb300,000, total assets of no more than
Rmb30m and fewer than 100 employees. The criteria for non-industrial enterprises are annual income
of less than Rmb300,000, total assets of no more than Rmb10m and fewer than 80 employees.
The Detailed Implementation Regulations permit companies to deduct from taxable income 50% of
research-and-development expenditures. Similarly, they may deduct 100% of expenditures in the form
of salaries to handicapped staff. For entertainment expenditures, 60% is deductible, but only up to an
amount equal to 0.5% of sales income of the year. Advertising expenditures are deductible, up to an
amount equivalent to 15% of business income of the year.
Certain tax holidays will remain in place even under the new laws and will be open to both foreign
and domestic enterprises. For example, the State Council, the Ministry of Finance and the State


Administration of Taxation issued Circular 1 in February 2008, providing the following incentives:
l Newly established software companies enjoy a two-year tax holiday and a 50% cut in taxes for three
years, counting from the first year of profitability.
l Integrated-circuit makers with investment of more than Rmb8bn and an operation period of at least
15 years can enjoy a five-year tax holiday followed by five years with a 50% reduction in tax payments.
The new tax regime will probably phase out other regulations from the past taxation regime, such
as special privileges for high-tech companies, since the new rules on high- and new-technology
enterprises have superseded them. However, grandfathering rules will ensure that they not disappear
all at once.
Prior to the 2008 Corporate Income Tax Law, FIEs in specific areas paid income tax at a reduced rate
of 24%; this applied to holiday-spending areas, coastal open cities and areas, open cities along rivers,
open cities near borders and provincial capitals in the central parts of China. All of these FIEs had to
begin paying tax at 25% from January 1st 2008, when the new law took effect.
Since January 1st 1994 representative offices have been subject to a business tax of 5% on gross
income sourced in China and an enterprise income tax of 33% (15% for representative offices in special
economic zones).
Foreign companies had criticised the lack of transparency and overly complex rules on taxation of
representative offices, and the SAT issued new rules on July 1st 2003 to address the issues. The rules
divided representative offices into the following three categories:
l companies engaged in commercial, legal, tax, accounting, auditing, consulting and services are
taxed on their actual income;
l companies engaged in trade and trade-agency operations are taxed on a cost-plus basis; and
l all companies not in the two first categories are taxes on actual income.
The SAT clarified the 2003 rules twice in 2004, in May and in June. The most welcome revision was
to reinstate tax-exempt status for representative offices that are principal suppliers for affiliated
manufacturing operations. More generally, the following income received is now subject to tax:
l commissions, rebates or handling charges for services performed (including acting as liaison during
negotiations or introducing business deals) by representative offices acting on behalf of their head
offices or as agents for overseas principals;
l rewards or periodic fixed fees based on the volume of commissioned services for services performed
by representative offices for their clients (including clients of their head offices); and
l commissions, rebates or handling charges for services provided by representative offices for acting
as agents for other enterprises in China or for assisting with negotiations or engaging in middleman
services.
The following activities are exempt from tax:
l providing market surveys and business information or providing business liaison and consultation
where no business or service income is received;



l acting as an agent for a Chinese enterprise outside China, with most of the activities conducted
outside the country; and
l acting as representative offices set up by foreign governments, non-profit organisations or civil
bodies engaged in non-taxable activities.
Article 4 of the unified tax regulations defines arrangements through business agents, as do double-
tax treaties signed by China with various foreign countries. Although the tax-regulations’ definition
does not differentiate between dependent and independent agents, use of an independent agent by a
foreign company does not constitute a permanent establishment.

Corporate taxation, 2011
China’s Corporate Income Tax Law took effect from January 1st 2008. The following are two illustrations of the tax burden
for an enterprise in China established after January 1st 2008. (For convenience, the amounts are in units of 1,000, which
could apply to renminbi or dollars.) The first applies to an enterprise engaged in production, the second to an enterprise
engaged in a non-production activity that is a payer of business tax.
Year 1 Year 2 Year 3 Year 4 Year 5
Turnover (VAT exclusive)a 1,000 2,000 3,000 4,000 5,000
Profits before taxes 100 200 300 400 500
Production enterprise
Income tax (25%) 25 50 75 100 125
Profits after taxes 75 150 225 300 375
Retained earnings, brought forward 0 75 25 0 100
Dividend distribution 0 200 250 200 0
Withholding income tax on dividend (10%)b 0 20 25 20 0
Retained earnings, carried forward 75 25 0 100 475
Non-production enterprise
Business tax (at an assumed rate of 5%)c 50 100 150 200 250
Profits after business tax but before income tax 50 100 150 200 250
Income tax (25%) 12.5 25 37.5 50 62.5
Profits after taxes 37.5 75 112.5 150 187.5
Retained earnings, brought forward 0 37.5 12.5 25 25
Dividend distribution 0 100 100 150 0
Withholding income tax on dividend (10%)b 0 10 10 15 0
Retained earnings, carried forward 37.5 12.5 25 25 212.5
(a) Value-added tax (VAT) is calculated on sale price and payable by purchasers. Export sales for most products are
zero rated, but VAT on domestic inputs, if any, may not be fully refunded upon export. Any non-refundable portion
is treated as costs of the enterprise. (b) Withholding income tax on dividends is 10% under China’s domestic tax
law, which may be reduced under a tax treaty, if applicable. (c) Business tax is calculated based on turnover.
Source: PricewaterhouseCoopers, Hong Kong.



Taxable income defined
The taxable income of a foreign-invested enterprise (FIE) is defined as the amount remaining from its
gross income in a tax year after deducting allowable expenses and losses. All documented costs are
allowable except those expressly identified as non-deductible.
Non-deductible expenses include the following: costs to purchase or construct fixed assets; costs
incurred on gains obtained through assignment or developing intangible assets; various income taxes
paid; interest on capital; late-payment surcharges and fines incurred for various income tax payments;
fines incurred for unlawful operations and losses sustained through the confiscation of property;
losses from windstorms, fire and other natural disasters covered by insurance indemnity; donations
and contributions other than those for public welfare and relief purposes; royalties paid to the head
office; and the portion of entertainment expenses either exceeding established quotas or not relevant
to production and operations.
Foreign taxes levied on FIEs in China may be credited against Chinese corporate taxes. Interest on
loans made to the Chinese government or Chinese state banks may be exempt from tax. Losses incurred
by an FIE may be carried forward for five years; no carry-back is permitted.

Depreciation
According to the Detailed Implementation Regulations for the Corporate Income Tax Law, issued
in December 2007, depreciation via the straight-line method is deductible and subject to minimum
depreciation periods. These range from 20 years for buildings and structures, ten years for aircraft,
trains and machinery, to three years for electronic equipment. Special depreciation rules apply for
foreign-invested enterprises engaged in oil and gas exploration; the Ministry of Finance and State
Administration of Taxation in April 2009 issued a circular setting a minimum eight-year depreciation
period for oil and gas enterprises.

Treatment of capital gains
The Detailed Implementation Regulations, released in December 2007, on the Corporate Income Tax
Law of 2008 set a basic withholding tax rate of 10% on capital gains on income sourced in China. This
also applies to net gains from the transfer of shares or equity interests in enterprises in China held
by foreign-invested enterprises (FIEs) and from the transfer of shares in enterprises in China held by
establishments or sites set up by FIEs in China. In December 2005, however, the State Administration
of Taxation and the Ministry of Finance made qualified foreign institutional investors (QFIIs) exempt
from taxes on the capital gains of their securities holdings in order to encourage more international
demand for China’s equity and debt. A provisional exemption from withholding tax applies to net



gains from a transfer by an FIE or foreign national of B-shares or shares in a Chinese enterprise listed
overseas (such as in Hong Kong or New York).
For gains on real property net of development costs, the Real-Property Gains Tax (RPGT) Provisional
Regulation, implemented on January 1st 1994, introduced the following tax rates: zero for the portion
of gains equalling up to 20% of the original purchase price; 30% for gains equalling up to 50%; 40%
for gains equalling 51–100%; 50% for gains equalling 101–200%; and 60% for gains exceeding 200%.
The Ministry of Finance released implementing regulations for the RPGT in January 1995: Detailed
Implementing Rules for the Provisional Regulations of China Concerning Land Value-Added Tax.
These rules outline certain permissible deductions to calculate added value. The rules note that China
will not levy taxes on real-property projects where agreements were reached before January 1st
1994. Exemption from property tax is also allowed where the property transfer is an owner-occupied
residential unit and the resident has lived there more than five years. There is a half-exemption for
those who have occupied a site for more than three years; those occupying a site for less time are
subject to full tax. RPGT applies to all types of land, structures and immovable property, including
commercial, industrial and residential sites.
The tax regime provides for expense deductions and additional allowances, which help to alleviate
the effect of the RPGT on projects begun after January 1994. The implementing regulations provide
for the full deduction of financing expenses and limited deductions for administration and selling
expenses. Nonetheless, the tax regime applies a 5% business tax on the sale price of property and the
standard 25% corporate profits tax. Hence, the effective tax on property income, despite allowable
deductions, is close to 50%.
Because RPGT is a source of revenue for local governments, a foreign investor can sometimes
negotiate a refund with a local government before committing to new projects. And since this is a
transactional tax, there may be some flexibility in administration and collection procedures. But
developers should proceed carefully and plan their tax structures assiduously to avoid exposing their
projects to added tax liabilities.

Taxes on interest and dividends
As from October 9th 2008, the State Council abolished a 5% tax on interest income from savings
accounts—to raise disposable incomes and boost domestic demand. The interest tax had earlier been
reduced from 20%, in August 2007.
The 2008 Corporate Income Tax and the Implementing Regulations make clear the abolition of
the tax exemption that was in place for dividends paid to foreign investors from profits in a foreign-
invested enterprise, whether it is a wholly-foreign-owned enterprise or a joint venture. The 10%
withholding tax applies, according to the Implementing Regulations.
The State Administration of Taxation issued a regulation in December 2008, retroactive from
January 1st 2008, imposing a 10% tax on interest earned by foreign banks lending to banks in China



Taxes on royalties and fees
A circular from the State Administration of Taxation (SAT) issued in late 1998 encourages non-residents
to make early payment of taxes on interest, rent and royalties. Specifically, it states that non-residents
must pay withholding tax during the period when interest, rent or royalties by a local party is payable
according to the terms of the contract. This holds even if the local party has not paid interest, rent or
royalties to the non-resident, and it has simply been accrued or expensed for accounting purposes.
The withholding tax rate on royalties and fees resulting from the licensing of trademarks, copyrights,
know-how and technical treaties is now generally 10%.
Under the Business Tax Law of 1994, technology transfers are subject to a business tax of 5% if the
transfers are not made by establishments in China. An SAT circular from January 1998 reinforced this
rule, saying the 5% business tax applies to royalties and is to be deducted, along with withholding tax,
from gross royalties by the transferee before paying the foreign transferor.
In April 2005 the SAT released a circular that stipulated new procedures on examining and
approving applications for reduction or exemption of the 5% tax for royalties involved in technology
import. Foreign companies can now apply for a tax reduction or exemption if the technology involved
is considered advanced. The procedure aims to encourage the import of technology and to standardise
the procedures for such tax reduction and exemption.

Double-tax treaties
By January 2011 China had signed and ratified agreements with 90 foreign governments. It had
also signed double-tax agreements with the special administrative regions Hong Kong and Macau.
The State Administration of Taxation issued a notice on April 13th 2001 to help foreign enterprises
and individuals avoid double taxation. Under it, tax bureaux at all levels must issue the residence
certificates needed by foreign enterprises and individuals. Although this does not change the criteria
under which foreigners are classified as taxpaying residents of China, it helps them provide the
necessary records to avoid double taxation—in both China and their home countries.
China and the Hong Kong Special Administrative Region signed a double-taxation agreement in
February 1998. Under it, the Chinese side does not tax a Hong Kong enterprise’s gains from transport
business in China, and vice versa. The arrangement also affected personal income taxes.



Withholding tax rates under double-tax treaties (%)
Country of recipient Dividends Interesta Royaltiesb Country of recipient Dividends Interesta Royaltiesb
Albania 10 10 10 Macedonia 5 10 10
Algeria 10/5 c 7 10 Malaysia 10 10 15m/10
Armenia 10/5 c 10 10 Malta 10 10 10
Australia 15 10 10 Mauritius 5 10 10
Austria 10/7 d 10/7k 10/6 Mexico 5 10 10
Azerbaijan 10 10 10 Moldova 10/5 c 10 10
Bahrain 5 10 10 Mongolia 5 10 10
Bangladesh 10 10 10 Morocco 10 10 10
Barbados 10/5 c 10 10 Netherlands 10 10 10/6
Belarus 10 10 10 New Zealand 15 10 10
Belgium 10 10 10/6 Nigeria 7.5 7.5 7.5
Brazil 15 15 25/15l Norway 15 10 10
Brunei 5 10 10 Oman 5 10 10
Bulgaria 10 10 10/7 Pakistan 10 10 12.5
Canada 15/10h 10 10 Papua New Guinea 15 10 10
Croatia 5 10 10 Philippines 15/10i 10 15m/10
Cuba 10/5c 7.5 5 Poland 10 10 10/7
Cyprus 10 10 10 Portugal 10 10 10
Czech Republic 10 10 10 Qatar 10 10 10
Denmark 10 10 10/7 Romania 10 10 7
Egypt 8 10 8 Russia 10 10 10
Estonia 10/5c 10 10 Saudi Arabia 5 10 10
Finland 10/5c 10 10/7 Seychelles 5 10 10
France 10 10 10/6 Singapore 10/5 c 10/7k 10/6
Georgia 10/5/0e 10 5 Slovakia 10 10 10
Germany 10 10 10/7 Slovenia 5 10 10
Greece 10/5 c 10 10 Sri Lanka 10 10 10
Hong Kong SAR 10/5f 7 7 South Africa 5 10 10/7
Hungary 10 10 10 South Korea 10/5 c 10 10
Iceland 10/5 c 10 10/7 Spain 10 10 10/6



Withholding tax rates under double-tax treaties (%) cont...
Country of recipient Dividends Interesta Royaltiesb Country of recipient Dividends Interesta Royaltiesb
India 10 10 10 Sudan 5 10 10
Indonesia 10 10 10 Sweden 10/5 c 10 10/7
Iran 10 10 10 Switzerland 10 10 10/6
Ireland 10/5 d 10 10/6 Tajikistan 10/5 c 8 8
Israel 10 10/7 k 10/7 Thailand 20/15f 10 15
Italy 10 10 10/7 Trinidad and Tobago 10/5 g 10 10
Jamaica 5 7.5 10 Tunisia 8 10 10/5 n
Japan 10 10 10 Turkey 10 10 10
Kazakhstan 10 10 10 Ukraine 10/5 c 10 10
Kuwait 5 5 10 United Arab Emirates 7 7 10
Kyrgyz Republic 10 10 10 United Kingdom 10 10 10/7
Laos 5 5 (in Laos) 5 (in Laos) United States 10 10 10/7
10 (in China) 10 (in China) Uzbekistan 10 10 10
Latvia 10/5 c 10 10 Venezuela 10/5 j 10/5 k 10
Lithuania 10/5 c 10 10 Vietnam 10 10 10
Luxembourg 10/5 c 10 10/6 Yugoslavia 5 10 10
Macao SAR 10/5 c 7 7 Non-treaty countries 10 10 10

Note: This table is a summary and does not reproduce all the provisions relevant to apply withholding taxes in each tax treaty. Besides the
above tax treaties, some of these countries have entered into investment-protection treaties with China.
(a) Nil on interest paid to government bodies except for Australia, Brunei, Cyprus, Israel, Slovenia and Spain. Reference should be made
to the individual tax treaties. (b) The lower rate on royalties applies for the use of or right to use any industrial, commercial or scientific
equipment. Reference should be made to the individual tax treaties. (c) The lower rate applies where the beneficial owner of the dividend
is a company (not a partnership) that directly owns at least 25% of the capital of the paying company. (d) The lower rate applies where the
beneficial owner of the dividend is a company that directly owns at least the paying company. (e) The lowest rate (that is, 0%) applies where
the beneficial owner is a company that owns directly or indirectly at least 50% of the capital of the paying company and the investment
exceeds €2m. The lower rate (that is, 5%) applies where the beneficial owner is a company that directly or indirectly owns at least 10% of the
capital of the paying company and the investment exceeds €100,000; (f) The lower rate applies where the beneficial owner of the dividend is
a company that directly owns at least 25% of the capital of the paying company. (g) The lower rate applies where the beneficial owner of the
dividend is a company that directly or indirectly owns at least 25% of the capital of the paying company. (h) The lower rate applies where the
beneficial owner of the dividend is a company that owns at least 10% of the voting shares of the paying company. (i) The lower rate applies
where the beneficial owner of the dividend is a company that directly owns at least 10% of the capital of the paying company. (j) The lower
rate applies where the beneficial owner is a company (other than a partnership) which directly owns at least 10% of the capital of the paying
company. (k) The lower rate applies to interest payable to banks or financial institutions. (l) The higher rate applies to trademarks. (m) The
higher rate applies to copyright of literary, artistic or scientific work including cinematographic films or tapes for television or broadcasting.
(n) The lower rate applies to royalties paid for technical or economic studies or for technical assistance.
Source: PricewaterhouseCoopers, Hong Kong.



Intercompany charges
The Unified Tax Law of 1991 plugged loopholes involving transfer pricing. It did this by requiring
foreign-invested enterprises (FIEs) to conduct business transactions with affiliated companies at arm’s
length (that is, as if with an unrelated company). To verify this treatment, FIEs must regularly submit
accounts to the local taxation bureau. Where intercompany charges or fees do not reflect an arm’s-
length arrangement, tax authorities may make compensatory adjustments by reference to normal
market rates or prices for similar services or goods.
The State Administration of Taxation (SAT) promulgated rules in April 1998 on taxing business
dealings between affiliated enterprises. Those rules specify what constitutes affiliated enterprises,
such as when one company holds at least 25% of another’s shares or when one company appoints more
than half of another’s board. The rules say tax authorities should particularly target companies that
have reported losses for more than two years and companies that engage in business with each other
inside duty-free ports.
The government has become stricter about transfer pricing. The Corporate Income Tax Law
applicable from January 1st 2008 gave the taxation agencies greater authority to intervene in
irregularities, allowing them to make adjustments if a tax-paying company has entered into an
arrangement “without reasonable commercial purpose”.
The SAT issued a notice on April 23rd 2003 allowing tax authorities to levy tax retroactively on
transactions between affiliated companies that took place up to ten years in the past—though certain
circumstances must apply for the ten-year retroactive period to apply. These conditions include
instances where transactions led to an increase of taxable income of at least Rmb500,000 or where the
affiliated company is in a tax haven.
The SAT had last addressed this problem in a circular on May 20th 1998, which set out rules on
transfer pricing. This circular on Tax Administration Rules and Procedures for Transactions between
Related Parties consolidated many existing regulations, added new provisions and superseded
all conflicting rules. Overall, it aimed to modernise policing of transactions by multinational
companies while harmonising regulations with international standards. Its 52 articles define “related
enterprises”, the factors that may lead a company to be audited and the methods the SAT can use
to calculate the proper level of transfer payments. The circular directed provincial tax bureaux to
establish specialist audit teams, and it requires Chinese tax authorities to share tax information with
one another.

Turnover, sales and excise taxes
China implemented a value-added tax (VAT) and a business tax on January 1st 1994 to replace the
industrial consolidated and commercial tax (a turnover tax levied on the transfer or sale of goods and
services). This system is changing as part of a general overhaul of the tax system.



Value-added tax (VAT) applies at a rate of 17% to the value of products at importation and wholesale
and retail sale. A 13% rate applies to some goods, such as grains, vegetable oils, books and utilities.
Beginning January 1st 2009, China extended a reform of the VAT system from certain trial areas to
cover all industries across the nation. Under the VAT reform, companies can use fixed-asset spending to
offset sales.
Also with effect from January 1st 2009, the VAT rate paid by small enterprises fell from 6% to 4%
for commercial companies and 3% for industrial companies. (“Small enterprises” are those engaged
in manufacturing or providing labour services with sales not exceeding Rmb1m, and those engaged in
wholesale or retail trade with sales not exceeding Rmb1.8m.)
The Provisional Regulations on Value-added Tax also were implemented from January 1st 2009. They
abolished previous VAT exemptions that foreign-invested enterprises (FIEs) had enjoyed for imported
equipment used to upgrade technology. The rules also abolished a VAT-refund policy for domestically
produced equipment acquired by FIEs.
As the financial crisis began to affect China more severely towards the end of 2008, the government
expanded the use for rebates available to exporters as refunds for VAT paid in the production process.
The rebate rates vary by the specific product.
Business tax, instead of VAT, applies to services including construction, entertainment, insurance,
posts and telecoms, real-property broking, transport and the assigning of intangible assets such as
copyrights, land-use rights, patents, trademarks and the sale of immovable property. The tax excludes
processing, repair and replacement services, which are subject to VAT. The business tax is either 3%
or 5% for most sectors except the entertainment business (which is taxed at 20%). New regulations
on the business tax, from January 1st 2009, make it possible to levy the tax even if the transaction is
performed outside China, as long as the entity liable for payment is within China’s borders.
Enterprises operating within the service sectors and liable for business tax have no mechanism to
claim VAT credit for inputs of goods subject to VAT. Unlike VAT, no credit is granted for business tax paid.
Tax paid on services received or properties acquired may not be deducted from business tax payable.
But deductions are allowed in certain designated industries.
Taxpayers engaged in business activities relating to more than one taxable category are required
to account separately for taxable items; otherwise, the highest tax rate applies. This applies to a
company that sells goods chargeable to VAT and provides after-sales services subject to business tax.
If a company cannot account separately for these activities, it will face the higher 17% VAT rate. Such
companies should set up different profit centres for each activity and maintain separate accounting
records and invoicing systems.
Consumption tax of 3–45% has applied since January 1994 to the following goods: alcohol,
cosmetics, diesel fuel, fireworks, hair- and skin-care products, jewellery, motorcycles, motor vehicles,
petrol and tobacco. The tax, meant to discourage excessive consumption of these goods, affects
mainly those companies involved in producing or importing them. The State Council adjusted the
consumption tax rate on cigarettes in 1998, raising it to 50% for deluxe categories. Exports are exempt
from consumption tax.



Other taxes
Foreign business operations may be assessed other taxes.
Licence tax can apply at the discretion of local authorities on vehicles and vessels belonging to
individuals and enterprises. Tax rates vary by tonnage for boats, Rmb0.60–5 per tonne, and by type
and size for vehicles, Rmb1.20–320 per unit.
Stamp tax, ranging from 0.005% (for loan agreements) to 0.1% (for warehousing and storage
contracts and also for property insurance contracts), applies to contracts, written certificates of
property-rights transfer, business account books and permits.
Local taxes. A building property tax applies annually on the owner or user of a property at 1.2% of
assessed value or 12% of rentals for leased property. The tax applies to Chinese legal entities, including
foreign-invested enterprises (FIEs) and individual citizens. A local land-use tax applies, at varying
rates depending on the size of the city or locale. All enterprises (including FIEs) incur a city and county
maintenance and construction tax.
In January 2011, the cities of Chongqing and Shanghai announced taxes on luxury property in
a measure that could gradually be expanded to other parts of China. The taxes, which took effect
immediately, were meant to cool the real-property market. In Chongqing, the tax is 0.5–1.2% of the
transaction price of all apartments and villas priced at twice the local average or more.
Natural resources tax. A National Resources Law, implemented on January 1st 1994, outlines tax
rates for enterprises and individuals engaged in exploiting mineral products or producing salt. Rates
for crude oil are Rmb8–30 per tonne; natural gas, Rmb2–15/1,000cu metre; coal, Rmb0.30–5/tonne;
other non-metal minerals, Rmb0.50–20/tonne; ferrous-metal mineral mining, Rmb2–30/tonne;
and non-ferrous-metal mineral mining, Rmb0.40–30/tonne. Tax liability arises on receipt or proof of
payment, and the tax is payable to local authorities at the place of production or exploitation. In June
2010 China introduced a 5% tax on the sale of crude oil and natural gas in its westernmost Xinjiang
region. The China Daily newspaper reported in January 2011 that the tax will cover all of China by 2015.



Key contacts
l American Chamber of Commerce in Beijing, Tower AB, Sixth Floor, 10 Jintongxi Lu, Chaoyang
District, Beijing 100020; Tel: (86.10) 8519-0800; Fax: (86.10) 8519-0899; Internet: http://www.
amcham-china.org.cn.
l Beijing Municipal Administration of Industry and Commerce, 36 Suzhou Jie, Haidian District, Beijing
100080; Tel: (86.10) 8269-1919; Internet: http://www.baic.gov.cn.
l British Chamber of Commerce in China, The British Centre Room 1001, China Life Tower, 16
Chaoyangmenwai Dajie, Chaoyang District, Beijing 100020; Tel: (86.10) 8525-1111; Fax: (86.10) 8525-
1100); Internet: http://www.britcham.org.
l Canada–China Business Council, Suite 11A16, Tower A, Hanwei Plaza, N7 Guanghua Lu, Chaoyang
District, Beijing 100004; Tel: (86.10) 8526-1820/21/22; Fax: (86.10) 6512-6125; Internet: http://
www.ccbc.com.
l China–Australia Chamber of Commerce, Eighth Floor, Office Tower, Beijing Hong Kong Macau Centre,
2 Chaoyangmenbei Dajie, Beijing 100027; Tel: (86.10) 6595 9252; Fax: (86.10) 6595 9253; Internet:
http://www.austcham.org.
l China Banking Regulatory Commission (CBRC), A-15 Jinrong Jie, Xicheng District, Beijing 100140;
Tel: (86.10) 6627-9113; Fax: (86.10) 6551-7664; Internet: http://www.cbrc.gov.cn.
l China Copyright Protection Centre (CCPC), Third Floor, Yonghe Plaza, West Building, 28
Andingmendong Dajie, Dongcheng District, Beijing 100007; Tel: (86.10) 6800-3887/5912/5814; Fax:
(86.10) 6800-3945; Internet: http:// www.ccopyright.com.cn/cpcc/index_en.jsp.
l China Council for the Promotion of International Trade, 1 Fuxingmenwai Dajie, Xicheng District,
Beijing 100860; Tel: (86.10) 8807-5000; Fax: (86.10) 6801-1370; Internet: http://www.ccpit.org.
l China Electronic Commerce Association (CECA), 27 Wanshou Lu, Haidian District, Beijing 100846;
Tel/Fax: (86.10) 6820-8238; Internet: http://www.ec.org.cn.
l China Export and Credit Insurance Corp (Sinosure), Fortune Times Building, 11 Fenghuiyuan,
Xicheng District, Beijing 100032; Tel: (86.10) 6658-2288; Internet: http://www.sinosure.com.cn.
l China Finance Certification Authority (CFCA), 20-3 Caishikou Nandajie Pingyuanli, Xicheng District,
Beijing 100054; Tel: (86.10) 8352-6530; Fax: (86.10) 6355-5032; Internet: http://www.cfca.com.cn
(Chinese only).
l China International Electronic Commerce Network, 11 Ronghua Zhonglu, Beijing Economy
Technology Development Area, Beijing 100176; Tel: (86.10) 8751-9058; Fax: (86.10) 8751-9036;
Internet: http://www.ec.cn.
l China Internet Network Information Centre (CNNIC), 4 Nansi Jie, Zhongguancun, Beijing 100190;
Tel: (86.10) 5881-3000; Fax: (86.10) 5881-2666; Internet: http://www.cnnic.com.cn.



l China Software Industry Association, 55 Xueyuan Nanlu, Haidian District, Beijing 100081; Tel:
(86.10) 5152-7160/7167; Fax: (86.10) 6218-6579; Internet: http://www.csia.org.cn.
l Export-Import Bank of China (Chexim), 30 Fuxingmennei Dajie, Xicheng District, Beijing 100031;
Tel: (86.10) 8357-9988; Fax: (86.10) 6606-0636; Internet: http://english.eximbank.gov.cn.
l General Administration of Customs (GAC), 6 Jianguomennei Dajie, Beijing 100730; Tel: (86.10) 6519-
4114; Fax: (86.10) 6519-4004; Internet: http://www.customs.gov.cn.
l Internet Society of China, 20 Zhaofu Street, Dongcheng District, Beijing 100009; Tel: (86.10) 6603-
6137; Internet: http://www.isc.org.cn.
l Ministry of Commerce (MOFCOM), 2 Dong Chang’an Jie, Beijing 100731; Tel: (86.10) 6512-1919; Fax:
(86.10) 6519-8173; Internet: http://www.mofcom.gov.cn.
l Ministry of Environmental Protection (MEP), 115 Xizhimennei Nanxiaojie, Xicheng District, Beijing
100035; Tel: (86.10) 6655-6006; Fax: (86.10) 6655-6010; Internet: http://www.mep.gov.cn.
l Ministry of Finance (MoF), 3 Nansanxiang, Sanlihe, Xicheng District, Beijing 100820; Tel: (86.10)
6855-1114; Fax: (86.10) 6855-1562; Internet: http://www.mof.gov.cn.
l Ministry of Housing and Urban-Rural Development, 9 Sanlihe Lu, Haidian District, Beijing 100835;
Tel/Fax: (86.10) 5893-3575; Internet: http://www.mohurd.gov.cn.
l Ministry of Human Resources and Social Security, 12 Hepingli Zhongjie, Dongcheng District, Beijing
100716; Tel: (86.10) 8420-1114; Internet: http://www.mohrss.gov.cn (Chinese only).
l Ministry of Industry and Information Technology (MIIT), 13 Xichang’an Jie, Beijing 100804; Tel:
(86.10) 6601-4599; Fax: (86.10) 6605-1370; Internet: http://www.miit.gov.cn (Chinese only).
l Ministry of Land and Resources, 64 Funei Dajie, Beijing 100812; Tel: (86.10) 6655-8682; Fax: (86.10)
6655-8114; Internet: http://www.mlr.gov.cn.
l Ministry of Transportation, 11 Jianguomennei Dajie, Beijing 100736; Tel: (86.10) 6529-2818; Fax:
(86.10) 6529-2819; Internet: http://www.moc.gov.cn.
l National Copyright Administration of China (NCAC), 40 Xuanwumenwai Dajie, Xuanwu District,
Beijing 100052; Tel: (86.10) 6512-7869/4433; Fax: (86.10) 6512-7875; Internet: http://www.ncac.
gov.cn (Chinese only).
l National Development and Reform Commission (NDRC), 38 Yuetannanjie, Xicheng District, Beijing
100824; Tel: (86.10) 6850-2401/6850-2117; Fax: (86.10) 6850-2728; Internet: http://www.ndrc.gov.
cn.
l Patent and Trademark Office, 800 Guoshun East Road, Yangpu District, Shanghai 200433; Tel:
(86.21) 6553-0729; Fax: (86.21) 6552-3115; Internet: http://www.chinatrademarkoffice.com.
l People’s Bank of China (PBoC), 32 Chenfangjie, Xicheng District, Beijing 100800; Tel: (86.10) 6619-
4114; Fax; (86.10) 6619-5370; Internet: http://www.pbc.gov.cn.



l Quality Brands Protection Committee, Room 228, 2F, 82 Dong’anmen Avenue, Dongcheng District,
Beijing 100747; Tel: (86.10) 8522-6276; Internet: http://www.qbpc.org.cn.
l State Administration for Foreign Exchange (SAFE), 18 Fucheng Lu, Haidian District, Beijing 100048;
Tel: (86.10) 6840-2265; Fax: (86.10) 6840-2147; Internet: http://www.safe.gov.cn.
l State Administration of Industry and Commerce (SAIC), 8 Sanlihe Dong Lu, Xicheng District, Beijing
100820; Tel: (86.10) 8865-0000; Fax: (86.10) 6857-0848; Internet: http://www.saic.gov.cn.
l State Administration of Taxation (SAT), 5 Yangfangdian Xilu, Haidian District, Beijing 100038; Tel:
(86.10) 6341-7114; Fax: (86.10) 6326-3366; Internet: http://www.chinatax.gov.cn.
l State Assets Supervision and Administration Commission (SASAC), 26 Xuanwumen Xidajie, Beijing
100053; Tel: (86.10) 6319-2000; Fax: (86.10) 6319-2325; Internet: http://www.sasac.gov.cn.
l State Intellectual Property Office (SIPO), 6 Xitucheng Lu, Jimenqiao, Haidian District, Beijing
100088; Tel: (86.10) 6208-3114; Fax: (86.10) 8208-6768; Internet: http://www.sipo.gov.cn.


China Hand
The complete guide to doing business in China:

Further content on how to do business in China is available from our China Hand service.
China Hand is the only practical China business reference guide with timely monthly updates
China Hand is the most comprehensive reference guide available on the political, economic and
business environment of the PRC. Establishing a profitable China business venture has never been easy.
Current reforms are generating new opportunities, but China’s business environment remains complex.
Whether you are a business executive just starting to explore the country’s vast market potential or
have operated there for some time, China Hand is the one source that will answer all your questions.
China Hand is made up of 12 chapters, with one published each month.
China Hand will help you to:
l Navigate China’s complex laws and regulations.
l Select the most suitable region and location for your investments.
l Stay up to date on all key issues affecting foreign business in China.
l Learn from the positive and negative experiences of other companies currently operating in China.
CONTENTS
Map
List of China’s provinces and their capitals
Chapter 1: Politics, economy and basic data
Chapter 2: Trade
Chapter 3: Finance
Chapter 4: Investing
Chapter 5: Investment locations
Chapter 6: Land and property
Chapter 7: Taxes
Chapter 8: Human resources
Chapter 9: Consumer marketing
Chapter 10: Intellectual property and licensing
Chapter 11: Distribution
Chapter 12: Infrastructure
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